Dr Chan: Do Not Gamble On Rebound During Large Market Correction

Large stock market corrections are unavoidable. Be careful if you want to gamble on rebound.

Previously, I have pointed out the difference between gambling on a rebound and bargain hunting. Although the share price of Tencent Holdings (700.HK) (Tencent) has recently tumbled to HK$380, it is still above HK$350 a month ago. At this price, investors will not be buying at a bargain. Buying into Tencent now tantamount to gambling on a possible rebound and should leave upon taking profit.

Buying interest returned when Tencent’s share price fell below HK$370 on 6 December 2017, as many were placing their bets on a rebound. But one could only hope for that, as the increase in Tencent’s share price had been too drastic for the past month and a large correction is unavoidable.

If you were to look at Tencent’s one-year stock chart, you will be able to clearly observe that its share price had largely deviated from its long-term trend in November.

Meanwhile, the mainland Chinese stock market is seeing an even greater correction, as the Chinese government heightened its crackdown on tax evasion to accelerate its deleveraging campaign. On top of that, China sees pressure on the country’s foreign direct investments, as it blames the US of setting in a motion a global race to cut taxes.

Will the stock market crash in 2018?

During the start of 2016, the Hang Seng Index (HSI) plunged to 18,000 points when circuit breakers were introduced into the bourse. After they were suspended, HSI recovered and even breached 24,000 points at its highest point. However, the rally did not sustain and it fell back to 22,000 points in December.

The motivation behind the sell-off in December was that many analysts had voiced their concerns that there would be a huge market crash in 2017.

Yet, already in the final month of 2017, and we have not seen a stock market rout. Would we see one in the remaining days?

Although a crash will most likely not take place in 2017, there will surely be naysayers who will warn of a crash in 2018. In that case, would you sell your stocks before the arrival of 2018?

Another reason behind HSI’s correction in December last year was the beginning of US interest rate hikes. Before it took place, many analysts claimed that the market had already digested the news. But as interest rate hikes unfolded, there was still downward pressures exhibited in the stock market.

The Federal Open Market Committee will have another meeting next week to discuss the prospects of interest rate. So far, media coverage seems limited. Is history repeating itself once again?